A lot of retail investors like to follow the recommendations of powerful sell side analysts and research houses in deciding what shares to buy and sell. After all the bigger the research house the more resources they have and more in-depth analysis they use to draw conclusions.
They don't come any bigger than Goldman Sachs, which recently downgraded its recommendation on shares in patent law firm IPH Ltd (ASX: IPH) to neutral from buy.
Luckily for shareholders the new rating was largely on valuation grounds.
The analysts ran the ruler over the business on August 21 after it reported its FY 2019 full year result.
"We remain positive on the outlook for the company, with the underlying business in good shape and scope for organic growth in Asia; further the balance sheet remains conservatively geared which should allow the company to pursue further accretive acquisitions; however as a result of recent share price performance we see IPH as fully valued and downgrade to Neutral (from Buy)," Goldman's commented.
On August 21 shares sold for $9.12 versus $9.18 today so Goldman's neutral rating is probably still in place.
IPH shares are up 69% over the past year and I must admit to being wrong in suggesting investors give this business a miss due to it being a legal services business not naturally suited to public life.
This is because nearly every genuinely successful law firm in the world operates in private partnership to incentivise staff to make partner status and win a profit share by working 'in partnership'. This is a similar model to the 'big 4' accounting firms for example where going public would not be popular with their partners.
Obviously fee-earning staff are critical to any legal services firm and being forced to share profits with public shareholders does not look an ideal operating model.
Still IPH has done well for now, although this is partly thanks to an acquisition model (that makes more sense if you're listed) and due to a tumbling Australian dollar.
I'd probably remain neutral on IPH at best a little like Goldman's fence sitting neutral rating.
Other less successful listed legal eagles that have tried to harness public markets to deliver acquisitive growth include Slater & Gordon Limited (ASX: SGH) and Shine Corporate Ltd (ASX: SHJ).
